erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Non-linearities over the Business Cycles: Evidence from Latin America

Pablo Mejía-Reyes (The University of Manchester, UK)

Abstract

Recurrent, frequent and deep recessions in developing countries may suggest that linear models could hardly represent the dynamics of economic growth. Actually, recessions as deep and volatile as those of those countries have not been experienced by developed economies. In this paper, smooth transition regression (STR) models are specified, estimated and evaluated to analyse non-linearities and asymmetries over the business cycle of several Latin American countries. In particular, asymmetries in magnitude of recessions and expansions are modelled as smooth changes in the intercept while evidence of asymmetric volatility is also reported. The investment to GDP ratio or real exchange rates are used as additional explanatory variables. In some cases we also found regime dependent effects of the real exchange rate on growth. The results suggest that this sort of models represent better than linear models the nature of the business cycle as measured by real GDP per capita growth rate. Thus, the direct implication is that conclusions drawn from theoretical models assuming linearity may be misleading. However, further empirical work concerning other countries is needed to draw more general conclusions.

Economic Research Center
Middle East Technical University
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